Current Affairs Comment

Yet again, the British government is in trouble with tax. The Daily Telegraph business section reported today (22 July 2008) that...

"in a letter to the CBI, the Treasury apparently relented on its plans to levy new taxes on multinational companies. With two already having opted to move their headquarters away from the UK and more threatening to follow suit, the business lobby's brinksmanship appears to have paid off. The Treasury, which in 2007's Budget unveiled skeleton plans for a major overhaul of the way foreign profits are taxed, yesterday admitted that it will have to go back to the drawing board.

Figures for June show that the UK's budget deficit has now reached the point that the Labour government will have to breach its own self-imposed borrowing rules. Naturally this has invited plenty of comment, most of it slightly off the point. On the right, it is suggested that too high a proportion of GDP is in the public sector and that cuts are needed. Nobody these days is arguing that taxes ought to go up. Brown is being criticised for not putting away money for a rainy day while things were good. But since he, like most people, had come to believe that the boom/bust cycle had been beaten, it is understandable that nothing was put aside as there would be no more rainy days.

Some 15,500 people lost their jobs in June, according to the Office for National Statistics. It is the biggest increase since 1992, and means 45,000 people have already lost their jobs since the start of the year. Economists warn of worse to come, as the economy slows sharply in the coming months and possibly dips into recession at least as bad as that of the early 1990s.

Vicky Redwood of Capital Economics said: "The latest labour market figures show that the upward trend in unemployment is picking up pace. Much worse is to come – we expect unemployment to rise by around 900,000 in total by the end of 2010."

The increase would take total unemployment from its current level of 1.6 million to 2.5 million.

Mortgages were being packaged, good and bad together, and sold on to investors, just as a shifty street market trader might sell boxes of apples with the good ones on top and rotten ones underneath. It has to be said that a lot of these "investors" were being remarkably stupid or naive not to check to see what was inside the box. This was a classic land price bubble, the speculators this time being ordinary home owners desperate to jump onto the so-called housing ladder. These recurrent financial storms cannot be prevented directly by legislation and regulation to impose control on banks and moneylenders.

The only way to stop a crisis like this from happening again is for government to collect all or most of the current rental value of all land and use it as the principal source of revenue. This would substantially eliminate the trading of land as a commodity, which is the underlying cause of the problem. The great bonus of such a reform is that present taxes on labour, goods and services could be much reduced and possibly eliminated entirely. There might even be a surplus which would allow a payment for every citizen in the country.

The prompt introduction of this form of Land Value Taxation also offers the best chance to get the economy out of the trouble it is in as quickly as possible.

In early July, we told our visitors to expect to hear more about the US mortage organisations Freddie Mac and Fannie Mae. As it is turning out, there is plenty to hear as the financial disaster unfolds. In case you are wondering what these organisations are, information on the companies' own websites explains...

According to the Swedish taxation board, Skatteverket, there is a large gap between the amount that it believes it should be collecting and what it actually manages to gather in, amounting to 5% of the gross national product. It is referred to as the Tax Gap. As nearly everywhere else, most of the tax is levied through charges on labour, goods and services. Skatteverket states that "The tax administration envisages a society in which everyone wishes to do their share."

This is a great ideal, but present taxes work against it, one consequence being the kind of leakage referred to. The obvious conclusion would be to seek for other sources of revenue which where not vulnerable to such leakage through avoidance and evasion. LVT perhaps?

Land reform in South Africa was discussed in a recent BBC programme "Crossing Continents - South Africa's Promised Land:" It investigated the South African government's controversial attempts to speed up the process of land reform.

During the colonial and apartheid periods, ancestral land was taken over by white farmers. In an attempt to redress the injustice, new laws allow descendents of the previous occupants to lay claim to this land, which the government will purchase at market rates and hand over. The programme referred to instances where farms had been taken over by former farm workers and continued successfully. This takes considerable skill and effort, without which the land reverts to bush. The programme reported that more often, the new black owners do not have the resources to keep the enterprises going. The farms are falling into neglect and nothing is being produced. Once land becomes the subject of a claim, the banks will not advance credit to the farmers and those enterprises too are being driven to closure.

"Britain's economic difficulties came to attention at a meeting of European Union finance ministers, who have voted to condemn Britain for flagrant breach of the Maastricht spending rules, irked that the UK government has not even tried to keep its budget deficit below the treaty limit of 3pc of national income. By its own admission, Labour will need to borrow at least 3.2pc of GDP this year, even if the economy holds up well.

"It warned that UK public finances were no longer on a sustainable course after the spending blitz of recent years. Yesterday's vote is the first time the EU has launched disciplinary action against a big Western state under the revamped Growth and Stability Pact. The UK now has the worst fiscal profile of any developed country in the North Atlantic sphere. The European Commission expects the UK's public debt to rise from 43.2pc of GDP last year to 47.5pc by the end of next year.

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